ECB's Draghi: We need fiscal union, not bank intervention

Mario Draghi, the president of the European Central Bank, signalled on
Thursday that the bank does not plan to prop up bond markets and urged
governments to move towards fiscal union to resolve the debt crisis.

Mario Draghi indicated a rate cut but said fiscal union was needed to solve the crisisPhoto: AFP

Mr Draghi, addressing the European parliament in Brussels, indicated the bank would cut official interest rates for the second time in two months at next week's policy meeting because downside risks to the economic outlook had increased.

But he said ECB bond buying to pull down borrowing rates can "only be limited" and there needs to be a "comprehensive deepening" of fiscal ties.

"What I believe our economic and monetary union needs is a new fiscal compact - a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made," he said.

"We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility."

“Draghi is trying to manage market expectations to make people understand the ECB won’t behave like the Bank of England and the Federal Reserve,” Michala Marcussen, global head of economics at Societe Generale in Paris

Mr Draghi told MEPs: "The ECB's monetary policy is constantly guided by the goal of maintaining price stability in the euro area over the medium term - and this applies to price stability in both directions."

"These comments do open up the chance for a rate cut," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

The ECB unexpectedly cut its benchmark interest rate by a quarter point to 1.25 percent earlier this month and all but one of 26 economists in a Bloomberg News survey predict another quarter-point reduction when policy makers meet on Dec. 8.

Mr Draghi joins a chorus of voices in demanding Brussels takes control of national budgets in a bit to stop the euro spiralling apart.

Nicolas Sarkozy, the French president, is expected to today swing behind Berlin and present ideas for a EU treaty change in a speech in Toulon. It is likely to be met with fierce protest in the Republic ahead of domestic elections, but Sarkozy is determined to avoid a credit rating downgrade.

Philipp Roesler, Germany's economy minister, said today it could take five years to fight the roots of the crisis. He said he agreed with coalition partners Angela Merkel and the Christian Social Union party that Germany could not accept eurobonds - common debt issuance which would see indebted Meditarrean nations piggy-back on Germany's strong credit nations.